The exchange rate between the euro and the dollar is approaching the point at which both currencies are worth the same amount. The euro is in a continuous downwards trend. In the past two weeks, the currency lost four per cent of its value against the dollar, and amounted to 1.06 dollar for one euro. That rate had not been seen in the past twelve months. The causes of the euro’s downwards trend and rising dollar can be found on both continents.
Donald Trump’s victory in the American presidential election resulted in a short-lived slump. On the day the results were announced and stock exchanges tumbled into the red, the rates recovered, and the day ended with black figures. Although Trump announced during the election that he would reconsider various free trade agreements, the market appears to have more faith in the investments he also announced in order to realise economic growth. A further consideration is that expectations for US interest rates have been adjusted; the Fed has announced that there may be an interest-rate increase in the offing.
But it is not just the dollar getting stronger, the euro is also facing uncertainty on the European market. The ECB has not yet given a sign that interest can be increased. This could attract more capital. Politically speaking, there are various uncertainties. After the Brexit, a referendum will be held in Italy next month. Italian Prime Minister Renzi will then take stock of the support for a change in the law which would liberalise the legislative process. Renzi has yoked his political future to the result of the referendum. If the result is ‘yes’ he can continue his reform agenda, which should help the Italian economy onwards. If the result is ‘no’ he will throw in the towel, and elections will be the next step.
Slightly further down the road, next year elections will be held in France, Germany and the Netherlands. In all of these countries, populist, right-wing parties are doing well in the polls. “Investors were surprised by Brexit and the result of the US election,” according to an American analyst in the Wall Street Journal. “They will be more careful this time, regarding Europe.”